Saving Europe’s Real Hegemon

MUNICH – Last June, the European Commission announced its about-face on bank restructuring. The money for recapitalizing distressed banks would now come primarily from creditors, not European taxpayers, with a pecking order to specify which lenders would be repaid first. All of this is welcome, at least in principle. In practice, however, the scheme leaves much to be desired.

The problem is that a very long list of exceptions reduces the recoverable assets to such an extent that in many cases it will still be impossible to make do without public money. The long-term plan is that this money should come from a fund created by European banks themselves. But the Eurogroup (a meeting of eurozone finance ministers attended by the European Union’s economic and monetary affairs commissioner and the European Central Bank president) is suggesting that, until then, the European Stability Mechanism (ESM) – and thus the taxpayers – will fill the gap.

Given that taxpayers are thus supposed to finance guarantees for deposits up to €100,000 ($133,000) – the median level of Dutch household wealth and twice the German median – the Eurogroup’s proposal boils down to a massive redistribution of wealth in Europe, the dimensions of which are not understood by the public.

The idea of exempting banks’ secured debt from the pecking order for repayment is extremely problematic as well. While this proposal may sound harmless and almost self-evident, it is not; secured debt needs no further protection, because it is already secured. Viewed from this perspective, the additional protection afforded by the exemption is highly surprising.